The length of time until the bond matures also affects the price. The longer before it matures, the more sensitive the bond will be to interest-rate movements on its price.

For example, a 10-year bond could lose up to 10 per cent of the original purchase price if the underlying 10-year yield moved up just 1 per cent from when the bond was purchased.

Why does this matter?

On 31 August, the Bloomberg Barclays Global Aggregate Bond index had just over 22,400 bonds globally, with a duration (average maturity of all the bonds) of seven years. Gross yield was just 2.55 per cent a year.

Not much of a return

After allowing for tax, hedging, fund manager costs, adviser fees, and inflation, New Zealand investors might be very surprised at how little’s left over for them in returns.

If global interest rates fall from their (already very low) current levels, an international bond fund like this might see a capital increase. But if global interest rates rise instead, the fund could suffer a capital loss.

Now’s a good time to review the income part of your portfolio to confirm what the average yield (return to maturity), credit rating, and duration (term to maturity) is.

If you believe interest rates could rise, then you will want to have a very short duration. In most cases you might find term deposits a better option but, at the very least, you should know what your hard-earned money is invested in.

Definitions

Bond: A bond is a fixed-income investment where an investor loans money to a body (typically councils or the government) for a time frame for an interest rate.

Bond yield: Yield is the money you make when a bond has reached maturity. It includes the price you paid for the bond, and the interest rate you receive.

Hedging: Hedging is an action where the fund manager removes the risk of an impact on performance from the NZ dollar movement in value against other currencies.

Quantitative easing: A monetary policy used by central banks and governments to stimulate their economy, often through the purchase of government bonds and increase in the supply of money.

Term deposit: This is a fixed-term deposit, held at a bank or similar.

First published 28 February 2019

This article does not contain any financial advice and has not taken into account any particular person’s circumstances. Before relying on it, we recommend you speak with a financial adviser. This story reflects the views of the contributor only. Content comes from sources that we consider are accurate, but we do not guarantee that the content is accurate.

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